Fraud-Control Expenses and Chargebacks Consume More of Merchants’ Revenues

Fraud-related expenses for merchants are rising as a percentage of revenues, and merchants now spend 10 times as much preventing fraud as they lose to chargebacks, according to new findings from Javelin Strategy & Research.

Pleasanton, Calif.-based Javelin says its June study of 497 e-commerce merchants found that merchants in 2017 are losing 8% of their revenues to fraud, up from 7.6% reported in a similar survey last year. But loses vary considerably by merchant type.

All the merchants polled online for the study earn $1 million or more annually. Some 142 of the merchants sell only digital goods, 155 sell only physical goods, and 200 are hybrids selling both types of goods. The study was commissioned by Portland, Ore.-based fraud-control technology provider Vesta Corp., which Javelin says had no influence on the findings.

Digital-goods merchants are losing 9.7% of their revenues to fraud-related expenses this year, up from 8.6% in 2016. Comparable 2017 and 2016 figures for physical-goods merchants are 7.7% and 6%. Hybrid merchants actually saw their fraud-related expenses decline to 7.1% of revenues versus 8.1% last year.

For all merchants, fraud management remains the biggest single component of all fraud-related expenses. For the total group, risk management is consuming 5.9% of revenues this year, up from 5.6% in 2016. Two other major components both rose only slightly: chargebacks to 0.6% of revenues, and losses from false positives to 1.6%.

As has been the case since the dawn of e-commerce more than two decades ago, digital-goods sellers have more fraud expenses than physical retailers. Javelin found that digital-only merchants this year are devoting 6.9% of revenues to fraud control, 0.8% to chargebacks, and 2% to false positives, all up from 2016. Physical goods sellers report spending 5.7% of revenues on fraud control, 0.7% on chargebacks, and 1.4% on false positives, also up across the board.

The hybrid merchants, however, saw expenses drop in all three categories: 5.3% for risk control, down from 5.8% in 2016; 0.4% for chargebacks versus 0.7% last year, and 1.3% for false positives, down from 1.6%.

As a percentage of operational costs, fraud-related expenses for the whole group rose to 21% from 18% last year. “This increase was greatest among physical goods merchants, likely due to the costs associated with the recent EMV deployment at point-of-sale locations,” the survey summary says. The report adds that the delayed implementation of EMV chip card-reading terminals saddled some merchants with physical stores with more chargebacks.

In other findings, the study says 75% of merchants this year are using user-name and password combinations for customer account access, up from 65% last year despite increasing reports about the weaknesses of that access method. Most merchants use a variety of other protection measures too. Some 45% report using two-factor authentication this year, up from 40% in 2016.